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Hiring an accountant is widely considered best practice for small business owners. However, delegating financial analysis & reporting doesn’t mean completely checking out of the process each month or quarter. On the contrary, it’s recommended that business owners work closely with their accountants throughout the year. This encourages better understanding their financial position & making smart plans for future growth.
Want to increase your accounting knowledge so you can have more informed, insightful discussions with your account this quarter?
Start right now, with this list of 6 essential accounting terms for small business owners.
Do you have more cash flowing into your business each month than you pay out to cover costs & expenses? If so, your accountant will conclude that you’re “cash flow positive.” If the opposite is true, your cash flow statement will reveal that you’re “cash flow negative.”
Having excess cash on hand means you’re better equipped to keep up with debt, cover unforeseen expenses, & invest in growth opportunities. Your accountant will generate a cash flow statement each quarter to keep tabs on this key performance indicator.
Profit & Loss Statement
The profit & loss statement (also known as the income statement) is one of the most important documents used by accountants to determine the profitability of your business.
The P&L statement lists revenues & gains as well as expenses & losses over a specific period of time (typically every three months for small businesses). It calculates your all important “bottom line” so you know if you’re operating at a loss or turning a profit.
Gross vs Net Profit
Gross profit is what remains when you subtract the cost of goods sold (COGS) from your total revenue. Net profit, on the other h&, drills deeper. It reveals your exact dollar per profit of sales after subtracting all operating expenses, including COGS, taxes, interest paid on debt, etc.
The balance sheet offers a snapshot of your overall financial position at a particular moment in time. It lists the assets (such as cash, inventory, accounts receivable, & equipment); liabilities (like accounts payable, income tax, & employee salaries); & shareholder capital. In a nutshell, the balance sheet shows what you own, as well as what you owe.
Accounts Receivable & Accounts Payable
Simply put, accounts receivable is money your business is owed by customers for goods or services sold. It is considered an asset on your balance sheet. Conversely, accounts payable is money you owe suppliers & any bills you have yet to pay, so it’s listed as a liability on your balance sheet.
Bad Debt Expenses
Bad debt happens when you can’t collect payment from your customers. Long term outstanding accounts receivable could be listed on your balance sheet as “bad debts”, & if they’re never collected, may have to be written off as a loss.
There you have it – 6 essential accounting terms to help you build your accounting vocabulary. They will allow you to join the conversation, & empower smarter decision-making.
Anytime you want to have a conversation around your current or potential business, Contact Us, we have the expertise & resources to guide your business.